Plans outlined in the Chancellor’s Spring fiscal statement to widen the category of “energy saving materials” benefitting from reduced VAT rates are to be welcomed. The measures are to include wind and water turbines but unfortunately the policy stops short of covering all the works involved in retrofitting our homes for energy efficiency.
It comes after Sunak also announced a new five-year 0% VAT rate for installing technology, including heat pumps and solar panels, in UK homes. The Chancellor said the measure was aimed at encouraging people to make their houses more energy efficient and lower their energy bills.
But as people grapple with the highest cost of living crisis for decades, many will ask if this is enough to encourage homeowners to commit to installing new technologies, which even with tax relief remain costly - and whether the 0% VAT rate should extend to all energy efficiency works.
The government is currently trying to meet its goal of having more than 600,000 heat pumps installed in UK homes each year by 2028.
Though it’s difficult to project a uniform cost for retrofitting a home, Zoe Guijaro of Citizens Advice, is reported to have told a Government committee that transitioning to a low-carbon heating system could cost “upwards of £20,000”, while the Climate Change Committee projected an average cost of around £10,000. This is because of additional costs associated with installing a low-carbon heating system, such as fitting new radiators or acquiring new plumbing.
The VAT announcement is a helpful incentive to meet that target, but heat pumps are unlikely to provide adequate heating in most cases - unless coupled with other measures such as insulation.
If this announcement does lead to increased uptake of these technologies, the challenge will be to ensure we have a workforce with the right skills to grow the heat pump and solar panel supply chains and to build grid capacity to accommodate the increased electrification of heat.
Swift progress on tackling these other challenges - and on the development of green finance products for homeowners - is needed if energy efficiency retrofitting and decarbonisation is to proceed at the pace required.
Sunak also announced plans to expand the “energy company obligation” to £1 billion per year for 2022-26, a move that would oblige suppliers to improve the energy efficiency of low-income homes.
While schemes designed to support the fuel poor have strived to overhaul our housing stock, the issue has been brought into sharp focus as consumers struggle with the fallout of the pricing crisis.
However, responsibility cannot solely be left with energy suppliers who are struggling with a rapidly changing energy landscape, price spikes, and the impact of the war in Ukraine. Tackling fuel poverty is rightly a priority for the government and the energy industry, but there are many sectors involved in the development, operation and maintenance of the UK’s housing stock that have an equally important role to play.
Siobhan Cross, Partner and real estate specialist at Pinsent Masons